On 29 August 2011, the PRC State Administration for Industry and Commerce (SAIC) released a draft (for public consultation)1 of the Opinions on Regulating Registrations of Corporate Mergers and Divisions in Support of Corporate Consolidations and Reorganisations (the "Draft Opinions").
Since the PRC State Council issued the Opinions on Promotion of Enterprise Consolidations and Reorganisations (Guo Fa  No. 27) on 28 August 2010, consolidations and reorganisations among business enterprises and companies in the PRC have gained momentum, involving enterprises and companies in different industries and with a variety of ownerships. It is no doubt that such corporate consolidations and reorganisations have enhanced the levels of scale economy, improved corporate governance and promoted specialisation in business. To ensure that such activities comply with laws and regulations on corporate mergers and divisions, the SAIC came to realise the need to consolidate and streamline the registration requirements in respect of new registrations, or amendments to existing registrations, of changes in corporate structures and ownerships resulting from such consolidations and reorganisations.
The Draft Opinions play a useful role in consolidating and reaffirming the registration requirements, procedures and relevant matters in connection with corporate mergers and divisions, which are scattered in various PRC laws, administrative regulations and rules, including the PRC Company Law, the Administrative Regulations on Company Registration and the Rules on Mergers and Divisions of Foreign-Invested Enterprises (FIEs). The key points under the Draft Opinions are summarised below.
Forms of mergers
The Draft Opinions reaffirm that corporate mergers may take two forms:
- merger by absorption;2 and
- merger by new incorporation.3
Forms of divisions
Under the Draft Opinions, corporate divisions may also take two forms:
- division by continued existence;4 and
- division by dissolution.5
Scope of application
- The Draft Opinions apply to registrations of mergers between and divisions of PRC domestic companies.
- If a merger by an FIE with a PRC domestic company or a division of an FIE results in a non-FIE surviving company or in a newly incorporated PRC company, the registration will be governed, where applicable, by the Draft Opinions and other relevant laws, administrative regulations and rules.
Forms of company
- A surviving company or a newly incorporated company resulting from a merger or division may take the form of a limited liability company or a company limited by shares, provided that it satisfies relevant requirements of the PRC Company Law.
- An application for deregistration, new registration or amendments to existing registration of the company or companies involved in a merger or division may be lodged with the SAIC within 45 days after the required announcement is published on such merger or division.
Merger and division agreements
- In respect of a surviving company or a newly incorporated company resulting from a merger or division, as applicable, relevant merger or division agreement must specify the amounts of the registered capital and paid-in capital, provided that the sum of the amounts of registered capital and of the amounts of paid-in capital does not exceed the sum of such amounts of the companies involved before the merger or division, as applicable. In calculating the sum of pre-merger registered capital and paid-in capital amounts, the amounts of registered capital and paid-in capital corresponding to any investment held by a company in another company or companies involved in such merger will be deducted from such amounts.
- The equity/share holdings of, and the amounts of registered capital subscribed for and paid-in by, shareholders of a surviving company or promoters of a newly incorporated company resulting from a merger or division must be specified in relevant merger or division agreement. If such matters are subject to any governmental approvals, the required approvals must be obtained before being registered with the SAIC. If a merger or division involves a company whose registered capital has not been contributed in full before a merger or division, such unfulfilled capital amount must be taken over by the surviving or newly incorporated company and contributed within schedule specified in relevant merger or division agreement.
- If a dissolved company or split company involved in a merger has branches, the merger or division agreement must also specify how to dispose of such branches. The registration of such branches must be cancelled before the merger or division if the parties so agree in the relevant merger or division agreement. If the parties agree that such branches will be transferred to a surviving company or a newly incorporated company, the registration of such branches must be amended to reflect the changes in their ownership.
- A merger or division agreement must also specify how to deal with any equity interest held by a merged or split company in another limited liability company. If such equity holdings are transferred to another person or purchased back by the merged or split company, the original registration of the merged or split company must be amended to reflect such changes in the equity holdings. If such equity interest is vested in a surviving company or a newly incorporated company after the merger or division, the original registration must also be amended to reflect the new holder.
Additional shareholders and increases in registered capital
- If a merger or division results in additional shareholders or increases in registered capital, such changes may also be registered at the time of applying for the amendments to the registration as a result of the merger or division, provided that such changes comply with relevant provisions of the PRC Company Law, the Administrative Regulations of Company Registrations and the constitutional documents of the companies involved.
The Draft Opinions serve as a helpful checklist for companies involved in mergers and divisions to go through in carrying out corporate consolidations and reorganisations. In respect of foreign investors' involvement in mergers and divestment of their FIEs in the PRC, additional requirements under the PRC Company Law, the Administrative Regulations of Company Registrations and the Rules on Mergers and Divisions of FIEs must also be examined and observed.